Regulatory Uncertainty and Corporate Responses to Environmental Protection in China

Abstract

We develop a framework to analyze the closing gap between regulation and enforcement of environmental protection in China and present a number of resulting implications for doing business there. We identify three major dimensions that characterize change in regulatory systems generally: priorities and incentives, bureaucratic alignment, and transparency and monitoring. Using these dimensions, we first unpack the mechanisms that characterized China's prior period, during which enforcement of environmental protection was decoupled from regulation. These mechanisms include (a) the intense emphasis on economic growth leading to misaligned incentives and regulatory competition across regions, (b) fragmented bureaucratic organization, and (c) lack of transparency and monitoring, all of which undermined enforcement. Then we show how, in each of these dimensions, regulation and enforcement are becoming realigned or recoupled over time. We show how this results from (a) a change in national development strategy to focus more on sustainable development and a harmonious society, (b) reorganization of the bureaucracy, and (c) an increase in monitoring by both the government and the general public. Correspondingly, we advance managerial implications that stem from these recent changes, illustrated by recent MNC and Chinese domestic firm successes. To address changes in policies and incentives, firms should align with governmental signals and embrace environmental innovation. Regarding bureaucratic alignment, firms should avoid regulatory shopping and integrate local and global standards. Finally, to address transparency and monitoring issues, firms should be transparent and compete on reputation. We conclude with a more general discussion of the contributions of our framework to understanding managerial practice in emerging-market regulatory contexts.

Exploitive working conditions have spurred the development of formal organizational structures that deploy mechanisms including legalization—adherence to a set of law-like rules and procedures—and worker participation to improve labor standards in global supply chains. Yet little is known about whether these structures are associated with improved working conditions, especially in organizations in which they compete with productivity-driving economic incentives. Drawing on the economic sociology of law and organizations as well as theories of organizational learning, we investigate whether and how these formal organizational structures, individually and in combination, are associated with improved working conditions. Using data on 3,276 suppliers in 55 countries, we find greater improvement at suppliers that adopt legalization structures (operationalized as management system standards) and worker participation structures (unions) and find that the combination of these structures amplifies improvement. We find less improvement at suppliers with organizational incentive structures meant to increase worker productivity (piece-rate pay), but also find that this negative relationship is attenuated by organizational legalization and worker participation structures. These findings challenge existing theories of decoupling by showing how these organizational structures can be credible signals for improvement and can also be coupled with organizational changes via processes of organizational learning, even in the face of intense efficiency demands. Furthermore, our findings suggest important strategic considerations for managers selecting supplier factories and provide key insights for the design of transnational sustainability governance regimes.